RAYMOND EDWARDS II, Plaintiff and Appellant, v. ARTHUR ANDERSEN LLP,
Defendant and Respondent.
S147190
SUPREME COURT OF CALIFORNIA
2008 Cal. LEXIS 9618
August 7, 2008, Filed
PRIOR HISTORY: [*1]
Court of Appeal Second Appellate District, Division Three, No.
B178246. Superior Court of Los Angeles County, No. BC 294853, Andria
K. Richey, Judge.
Edwards v. Arthur Andersen LLP, 142 Cal. App. 4th 603, 47 Cal. Rptr.
3d 788, 2006 Cal. App. LEXIS 1320 (Cal. App. 2d Dist., 2006)
COUNSEL: Law Offices of Richard A. Love, Richard A. Love, Beth A.
Shenfeld; Greines, Martin, Stein & Richland, Marc J. Poster and Robin
Meadow for Plaintiff and Appellant.
Kastner Banchero, Eric C. Kastner and Scott R. Raber as Amici Curiae
on behalf of Plaintiff and Appellant.
Feldman Gale, James A. Gale, Todd M. Malynn and Michael J. Weber for
St Jude Medical, S.C., Inc., Pacesetter, Inc., and Advanced Bionics
Cor****ation as Amici Curiae on behalf of Plaintiff and Appellant.
Law Offices of Jeffery K. Winikow and Jeffrey K. Winikow for
California Employment Lawyers Association as Amicus Curiae on behalf
of Plaintiff and Appellant.
Mark A. Lemley; Morrison & Foerster and James Pooley for Professors
and Writers of Learned Treatises as Amicus Curiae on behalf of
Plaintiff and Appellant.
Latham & Watkins, Wayne S. Flick, Yury Kapgan, Kristine L. Wilkes,
Colleen C. Smith, ****reen M. Becker; and Sharon A. McFadden for
Defendant and Respondent.
Paul, Hastings, Janofsky & Walker, Paul Grossman and Jennifer S.
Baldocchi for California Employment Law Council [*2] and Activision,
Inc., as Amici Curiae on behalf of Defendant and Respondent.
O'Melveny & Myers, Scott H. Dunham and Christopher W. Decker for
Employers Group as Amicus Curiae on behalf of Defendant and
Respondent.
JUDGES: Opinion by Chin, J., with George, C. J., Baxter, Moreno, and
Corrigan, JJ., concurring. Kennard, J., concurring and dissenting.
Werdegar, J., concurring and dissenting.
OPINION BY: Chin
OPINION
CHIN, J.=97We granted review to address the validity of noncompetition
agreements in California and the permissible scope of employment
release agreements. We limited our review to the following issues: (1)
To what extent does Business and Professions Code section 16600 n1
prohibit employee noncompetition agreements; and (2) is a contract
provision requiring an employee to release =93any and all=94 claims
unlawful because it encomp***** nonwaivable statutory protections,
such as the employee indemnity protection of Labor Code section 2802?
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1
All further unlabeled statutory references are to the Business and
Professions Code.
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(1) We conclude that section 16600 prohibits employee noncompetition
agreements unless the agreement falls within a statutory exception,
and that a contract provision whereby an employee releases =93any [*3]
and all=94 claims does not encompass nonwaivable statutory protections,
such as the employee indemnity protection of Labor Code section 2802.
We therefore affirm in part and reverse in part the Court of Appeal
judgment.
FACTS
In January 1997, Raymond Edwards II (Edwards), a certified public
accountant, was hired as a tax manager by the Los Angeles office of
the accounting firm Arthur Andersen LLP (Andersen). Andersen's
employment offer was made contingent upon Edwards's signing a
noncompetition agreement, which prohibited him from working for or
soliciting certain Andersen clients for limited periods following his
termination. The agreement was required of all managers, and read in
relevant part: =93If you leave the Firm, for eighteen months after
release or resignation, you agree not to perform professional services
of the type you provided for any client on which you worked during the
eighteen months prior to release or resignation. This does not
prohibit you from accepting employment with a client. [=B6] For twelve
months after you leave the Firm, you agree not to solicit (to perform
professional services of the type you provided) any client of the
office(s) to which you were assigned during [*4] the eighteen months
preceding release or resignation. [=B6] You agree not to solicit away
from the Firm any of its professional personnel for eighteen months
after release or resignation.=94 Edwards signed the agreement.
Between 1997 and 2002, Edwards continued to work for Andersen, moving
into the firm's private client services practice group, where he
handled income, gift, and estate tax planning for individuals and
entities with large incomes and net worth. Over this period he was
promoted to senior manager and was on track to become a partner. In
March 2002, the United States government indicted Andersen in
connection with the investigation into Enron Cor****ation, and in June
2002, Andersen announced that it would cease its accounting practices
in the United States. In April 2002, Andersen began selling off its
practice groups to various entities. In May 2002, Andersen internally
announced that HSBC USA, Inc. (a New York-based banking cor****ation),
through a new subsidiary, Wealth and Tax Advisory Services (WTAS),
would purchase a ****tion of Andersen's tax practice, including
Edwards's group.
In July 2002, HSBC offered Edwards employment. Before hiring any of
Andersen's employees, HSBC [*5] required them to execute a
=93Termination of Non-compete Agreement=94 (TONC) in order to obtain
employment with HSBC. Among other things, the TONC required employees
to, inter alia, (1) voluntarily resign from Andersen; (2) release
Andersen from =93any and all=94 claims, including =93claims that in any
way
arise from or out of, are based upon or relate to Employee's
employment by, association with or compensation from=94 defendant; (3)
continue indefinitely to preserve confidential information and trade
secrets except as otherwise required by a court or governmental
agency; (4) refrain from disparaging Andersen or its related entities
or partners; and (5) cooperate with Andersen in connection with any
investigation of, or litigation against, Andersen. In exchange,
Andersen would agree to accept Edwards's resignation, agree to
Edwards's employment by HSBC, and release Edwards from the 1997
noncompetition agreement.
HSBC required that Andersen provide it with a completed TONC signed by
every employee on the =93Restricted Employees=94 list before the deal went
through. At least one draft of the Restricted Employees list contained
Edwards's name. Andersen would not release Edwards, or any other
employee, [*6] from the noncompetition agreement unless that
employee signed the TONC.
Edwards signed the HSBC offer letter, but he did not sign the TONC. n2
In response, Andersen terminated Edwards's employment and withheld
severance benefits. HSBC withdrew its offer of employment to Edwards.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -2
Edwards's reasons for refusing to sign the TONC included the fact that
he believed it required him to give up his right to indemnification,
which he felt was particularly im****tant in light of the government's
investigation into the company. Edwards also believed several of
Andersen's clients for whom he did work would sue Andersen and name
him as a defendant, and if that were the case he wanted to ensure he
retained his right to indemnification.
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PROCEDURAL HISTORY
On April 30, 2003, Edwards filed a complaint against Andersen, HSBC
and WTAS for intentional interference with prospective economic
advantage and anticompetitive business practices under the Cartwright
Act (Bus. & Prof. Code, =A7 16720 et seq.). Edwards alleged that the
Andersen noncompetition agreement violated section 16600, which states
=93[e]xcept as provided in this chapter, every contract by which anyone
is restrained from engaging in a lawful profession, [*7] trade, or
business of any kind is to that extent void.=94 He further alleged that
the TONC's release of =93any and all=94 claims violated Labor Code
sections 2802 and 2804, which make an employee's right to
indemnification from his or her employer nonwaivable.
Edwards settled with all parties except Andersen. The trial court
sustained Andersen's demurrer to Edwards's Cartwright Act claim
without leave to amend, concluding Edwards lacked standing to bring
the action. It then denied Andersen's subsequent motion for summary
adjudication on Edwards's intentional interference with prospective
economic advantage cause of action, after concluding that triable
issues of fact existed on the meaning of the agreements, and whether
the agreements protected trade secrets. The court then granted
Andersen's motion to sever trial on the issue of the enforceability of
the noncompetition agreement and the TONC. (Code Civ. Proc. =A7=A7 598,
1048, subd. (b).) The court dismissed all claims against Andersen,
except for those relating to intentional interference with prospective
economic advantage, which it concluded presented pure questions of
law.
The trial court heard argument from both parties, but took no
evidence. [*8] The court determined all issues of law in favor of
Andersen on the merits, and entered judgment in its favor. The court
specifically decided that (1) the noncompetition agreement did not
violate section 16600 because it was narrowly tailored and did not
deprive Edwards of his right to pursue his profession; and (2) the
TONC did not pur****t to waive Edwards's right to indemnification.
Thus, requiring him to sign these do***ents was not unlawful. Edwards
appealed the trial court's decision.
(2) At issue in the Court of Appeal was one of the elements required
to prove a claim for intentional interference with prospective
economic advantage. In order to prove a claim for intentional
interference with prospective economic advantage, a plaintiff has the
burden of proving five elements: (1) an economic relation****p between
plaintiff and a third party, with the probability of future economic
benefit to the plaintiff; (2) defendant's knowledge of the
relation****p; (3) an intentional act by the defendant, designed to
disrupt the relation****p; (4) actual disruption of the relation****p;
and (5) economic harm to the plaintiff proximately caused by the
defendant's wrongful act, including an intentional [*9] act by the
defendant that is designed to disrupt the relation****p between the
plaintiff and a third party. (Korea Supply Co. v. Lockheed Martin
Corp. (2003) 29 Cal.4th 1134, 1153=961154 [131 Cal. Rptr. 2d 29, 63 P.3d
937].) The plaintiff must also prove that the interference was
wrongful, independent of its interfering character. (Della Penna v.
Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 392=96393 [45
Cal. Rptr. 2d 436, 902 P.2d 740].) =93[A]n act is independently wrongful
if it is unlawful, that is, if it is proscribed by some
constitutional, statutory, regulatory, common law, or other
determinable legal standard. (Korea Supply, supra, 29 Cal.4th at p.
1159.)
At issue here is the third element of the tort. In the Court of
Appeal, Edwards argued the independently wrongful acts requirement in
this case was met in several ways that are pertinent here: (1) the
noncompetition agreement was illegal under section 16600, making
Andersen's demand that he give consideration to be released from it
against public policy; (2) the TONC's additional release of =93any and
all=94 claims constituted a waiver of his indemnity rights in violation
of Labor Code sections 2802 and 2804; and (3) the TONC's
nondisparagement clause violated Labor Code section 1102.5.
In the published [*10] part of its opinion, the Court of Appeal
held: (1) the noncompetition agreement was invalid under section
16600, and requiring Edwards to sign the TONC as consideration to be
released from it was an independently wrongful act for purposes of the
elements of Edwards's claim for intentional interference with
prospective economic advantage; (2) the TONC pur****ted to waive
Edwards's indemnification rights under the Labor Code and was
therefore in violation of public policy and an independently wrongful
act; and (3) the TONC's nondisparagement provision did not violate
Labor Code section 1102.5 and so was not an independently wrongful
act. As initially discussed, we limited our review to resolve the
first two issues.
DISCUSSION
A. Section 16600
Under the common law, as is still true in many states today,
contractual restraints on the practice of a profession, business, or
trade, were considered valid, as long as they were reasonably imposed.
(Bosley Medical Group v. Abramson (1984) 161 Cal.App.3d 284, 288 [207
Cal. Rptr. 477].) This was true even in California. (Wright v. Ryder
(1868) 36 Cal. 342, 357 [relaxing original common law rule that all
restraints on trade were invalid in recognition of increasing
population [*11] and competition in trade].) However, in 1872
California settled public policy in favor of open competition, and
rejected the common law =93rule of reasonableness,=94 when the Legislature
enacted the Civil Code. (Former Civ. Code, =A7 1673, repealed by Stats.
1941, ch. 526, =A7 2, p. 1847, and enacted as Bus. & Prof. Code, =A7
16600, Stats. 1941, ch. 526, =A7 1, p. 1834; Bosley, supra, 161 Cal.App.
3d at p. 288.) n3 Today in California, covenants not to compete are
void, subject to several exceptions discussed briefly below.
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Prior to oral argument, we granted Andersen's request that we take
judicial notice of various do***ents providing information on the
history of section 16600 and its predecessor statutes. (Evid. Code, =A7=A7
452, 453, 459.)
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(3) Section 16600 states: =93Except as provided in this chapter, every
contract by which anyone is restrained from engaging in a lawful
profession, trade, or business of any kind is to that extent void.=94
The chapter excepts noncompetition agreements in the sale or
dissolution of cor****ations (=A7 16601), partner****ps (ibid.; =A7 16602),
and limited liability cor****ations (=A7 16602.5). In the years since its
original enactment as Civil Code section 1673, our courts have
consistently [*12] affirmed that section 16600 evinces a settled
legislative policy in favor of open competition and employee mobility.
(See D'sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933 [102 Cal.
Rptr. 2d 495].) The law protects Californians and ensures =93that every
citizen shall retain the right to pursue any lawful employment and
enterprise of their choice.=94 (Metro Traffic Control, Inc. v. Shadow
Traffic Network (1994) 22 Cal.App.4th 853, 859 [27 Cal. Rptr. 2d
573].) It protects =93the im****tant legal right of persons to engage in
businesses and occupations of their choosing.=94 (Morlife, Inc. v. Perry
(1997) 56 Cal.App.4th 1514, 1520 [66 Cal. Rptr. 2d 731].)
This court has invalidated an otherwise narrowly tailored agreement as
an improper restraint under section 16600 because it required a former
employee to forfeit his pension rights on commencing work for a
competitor. (Muggill v. Reuben H. Donnelley Corp. (1965) 62 Cal.2d
239, 242=96243 [42 Cal. Rptr. 107, 398 P.2d 147] (Muggill); Chamberlain
v. Augustine (1916) 172 Cal. 285, 289 [156 P. 479] [invalidating
contract with partial trade restriction].) In Muggill, the court
reviewed an adverse judgment against a company's retired employee
whose pension plan rights were terminated after the former employee
commenced work for a competitor. (Muggill, at p. 240.) The [*13]
retired employee had sued the former employer, seeking declaratory
relief on the ground that the provision in the pension plan that
terminated the retirement payments because the retiree went to work
for a competitor was =93against public policy and
unenforceable.=94 (Ibid.) Muggill held that, with exceptions not
applicable here, section 16600 invalidates provisions in employment
contracts and retirement pension plans that prohibit =93an employee from
working for a competitor after completion of his employment or
imposing a penalty if he does so [citations] unless they are necessary
to protect the employer's trade secrets [citation].=94 (Muggill, at p.
242.) n4 In sum, following the Legislature, this court generally
condemns noncompetition agreements. (See, e.g., Armendariz v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 123,
fn. 12 [99 Cal. Rptr. 2d 745, 6 P.3d 669] [such restraints on trade
are =93illegal=94].)
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We do not here address the applicability of the so-called trade secret
exception to section 16600, as Edwards does not dispute that ****tion
of his agreement or contend that the provision of the noncompetition
agreement prohibiting him from recruiting Andersen's employees
violated section 16600.
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(4) Under [*14] the statute's plain meaning, therefore, an employer
cannot by contract restrain a former employee from engaging in his or
her profession, trade, or business unless the agreement falls within
one of the exceptions to the rule. (=A7 16600.) Andersen, however,
asserts that we should interpret the term =93restrain=94 under section
16600 to mean simply to =93prohibit,=94 so that only contracts that
totally prohibit an employee from engaging in his or her profession,
trade, or business are illegal. It would then follow that a mere
limitation on an employee's ability to practice his or her vocation
would be permissible under section 16600, as long as it is reasonably
based.
Andersen contends that some California courts have held that section
16600 (and its predecessor statutes, Civil Code former sections 1673,
1674, and 1675) are the statutory embodiment of prior common law, and
embrace the rule of reasonableness in evaluating competitive
restraints. (See, e.g., South Bay Radiology Medical Associates v.
Asher (1990) 220 Cal.App.3d 1074, 1080 [269 Cal. Rptr. 15] (South Bay
Radiology) [=A7 16600 embodies common law prohibition against restraints
on trade]; Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th
34, 47=9648 [6 Cal. Rptr. 2d 602] [*15] (Vacco) [=A7 16600 is
codification of common law reasonable restraint rule].) Andersen
claims that these cases show that section 16600 =93prohibits only broad
agreements that prevent a person from engaging entirely in his chosen
business, trade or profession. Agreements that do not have this broad
effect=97but merely regulate some aspect of post-employment conduct,
e.g., to prevent raiding [employer's personnel]=97are not within the
scope of [s]ection 16600.=94
As Edwards observes, however, the cases Andersen cites to sup****t a
relaxation of the statutory rule simply recognize that the statutory
exceptions to section 16600 reflect the same exceptions to the rule
against noncompetition agreements that were implied in the common law.
For example, South Bay Radiology acknowledged the general prohibition
against restraints on trade while applying the specific partner****p
dissolution exception of section 16602 to the facts of its case.
(South Bay Radiology, supra, 220 Cal.App.3d at p. 1080.) In that case,
the covenant not to compete was set forth in a partner****p agreement
to which appellant doctor was a party. When appellant's partner****p
with several other doctors dissolved due to his inability [*16] to
work following an accident, he challenged the noncompete clause. The
court found the partner****p exception to section 16600 applicable.
(South Bay Radiology, supra, at pp. 1078=961080.)
Vacco involved the sale of shares in a business, an exception to
section 16600 found in section 16601. The Court of Appeal upheld an
agreement not to compete made by a terminated employee who had sold
all of his stock in the business for $ 500,000 prior to his
termination. In applying the exception to section 16600, the court
held that section 16601 =93permits agreements not to compete made by a
party selling the goodwill of a business or all of the shares of stock
in a cor****ation.=94 (Vacco, supra, 5 Cal.App.4th at p. 47.) As the
present Court of Appeal recognized, =93Fairly read, the foregoing
authorities suggest section 16600 embodies the original, strict common
law antipathy toward restraints of trade, while the section 16601 and
16602 exceptions incor****ated the later common law =91rule of
reasonableness=92 in instances where those exceptions apply.=94
(5) We conclude that Andersen's noncompetition agreement was invalid.
As the Court of Appeal observed, =93The first challenged clause
prohibited Edwards, for an 18-month [*17] period, from performing
professional services of the type he had provided while at Andersen,
for any client on whose account he had worked during 18 months prior
to his termination. The second challenged clause prohibited Edwards,
for a year after termination, from =91soliciting,=92 defined by the
agreement as providing professional services to any client of
Andersen's Los Angeles office.=94 The agreement restricted Edwards from
performing work for Andersen's Los Angeles clients and therefore
restricted his ability to practice his accounting profession. (See
Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1429 [7 Cal.
Rptr. 3d 427] [distingui****ng =93trade route=94 and solicitation cases
that protect trade secrets or confidential proprietary information].)
The noncompetition agreement that Edwards was required to sign before
commencing employment with Andersen was therefore invalid because it
restrained his ability to practice his profession. (See Muggill,
supra, 62 Cal.2d at pp. 242=96243.)
B. Ninth Circuit's Narrow-restraint Exception
Andersen asks this court to adopt the limited or =93narrow-restraint=94
exception to section 16600 that the Ninth Circuit discussed in
Campbell v. Trustees of Leland Stanford Jr. Univ. (9th Cir. 1987) 817
F.2d 499 [*18] (Campbell), and that the trial court relied on in
this case in order to uphold the noncompetition agreement. In
Campbell, the Ninth Circuit acknowledged that California has rejected
the common law =93rule of reasonableness=94 with respect to restraints
upon the ability to pursue a profession, but concluded that section
16600 =93only makes illegal those restraints which preclude one from
engaging in a lawful profession, trade, or business.=94 (Campbell,
supra, 817 F.2d at p. 502.) The court remanded the case to the
district court in order to allow the employee to prove that the
noncompetition agreement at issue completely restrained him from
practicing his =93profession, trade, or business within the meaning of
section 16600.=94 (Campbell, at p. 503.)
The confusion over the Ninth Circuit's application of section 16600
arose in a paragraph in Campbell, in which the court noted that some
California courts have excepted application of section 16600 =93 =91where
one is barred from pursuing only a small or limited part of the
business, trade or profession.=92 =94 (Campbell, supra, 817 F.2d at p.
502.) The Ninth Circuit cited two California cases that it believed
may have carved out such an exception to section 16600. [*19] (See
Boughton v. Socony Mobil Oil Co. (1964) 231 Cal.App.2d 188 [41 Cal.
Rptr. 714] (Boughton) [interpreting deed restriction on land use] and
King v. Gerold (1952) 109 Cal.App.2d 316 [240 P.2d 710] (King)
[rejecting manufacturer's argument that clause not to produce its
product after license expiration was not an illegal restraint under
section 16600].) Andersen relies on those cases, citing them as the
underpinnings of the Ninth Circuit's exception to section 16600, and
urges the court to adopt their reasoning here.
As the Court of Appeal observed, however, the analyses in Boughton and
King do not provide persuasive sup****t for adopting the narrow-
restraint exception. In Boughton, the restriction was not upon the
plaintiff's practice of a profession or trade, but took the form of a
covenant in a deed to a parcel of land that specified the land could
not be used as a gasoline service station for a specified time period.
(Boughton, supra, 231 Cal.App.2d 188.) Because the case involved the
use of the land, section 16600 was not implicated. Of note is the fact
that Boughton relied on King, an unfair competition case in which the
court applied a trade secret exception to the statutory rule against
noncompetition clauses. [*20] (King, supra, 109 Cal.App.2d 316.) In
King, the plaintiff was not simply engaged in the manufacture and sale
of goods (house trailers) but was allegedly using a trailer design
substantially similar to his former employer's, the inventor of the
design. (Id. at p. 318.)
Andersen is correct, however, that Campbell has been followed in some
recent Ninth Circuit cases to create a narrow-restraint exception to
section 16600 in federal court. For example, International Business
Machines Corp. v. Bajorek (9th Cir. 1999) 191 F.3d 1033, upheld an
agreement mandating that an employee forfeits stock options if
employed by a competitor within six months of leaving employment.
General Commercial Packaging v. TPS Package (9th Cir. 1997) 126 F.3d
1131, held that a bargained-for contractual provision barring one
party from courting a specific named customer was not an illegal
restraint of trade prohibited by section 16600, because it did not
=93entirely preclude[]=94 the party from pursuing its trade or business.
(General Commercial Packaging v. TPS Package, supra, 126 F.3d at p.
1133.)
(6) Contrary to Andersen's belief, however, California courts have not
embraced the Ninth Circuit's narrow-restraint exception. [*21]
Indeed, no re****ted California state court decision has endorsed the
Ninth Circuit's reasoning, and we are of the view that California
courts =93have been clear in their expression that section 16600
represents a strong public policy of the state which should not be
diluted by judicial fiat.=94 (Scott v. Snelling and Snelling, Inc.
(N.D.Cal. 1990) 732 F. Supp. 1034, 1042.) n5 Section 16600 is
unambiguous, and if the Legislature intended the statute to apply only
to restraints that were unreasonable or overbroad, it could have
included language to that effect. (7) We reject Andersen's contention
that we should adopt a narrow-restraint exception to section 16600 and
leave it to the Legislature, if it chooses, either to relax the
statutory restrictions or adopt additional exceptions to the
prohibition-against-restraint rule under section 16600.
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -5
As noted, the Ninth Circuit's reading of Boughton, supra, 231 Cal.App.
2d 188, and King, supra, 109 Cal.App.2d 316 may be the source of that
Circuit's narrow-restraint exception to section 16600. We are not
persuaded that Boughton or King provides any guidance on the issue of
noncompetition agreements, largely because neither involved
noncompetition agreements [*22] in the employment context. However,
to the extent they are inconsistent with our analysis, we disapprove
Boughton v. Socony Mobil Oil Co., supra, 231 Cal.App.2d 188, and King
v. Gerold, supra, 109 Cal.App.2d 316.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
C. Contract Provision Releasing =93Any and All=94 Claims
(8) Edwards was not terminated from Andersen for refusing to sign the
noncompetition agreement. Rather, Andersen made it a condition of
Edwards's obtaining employment with HSBC that Edwards execute the
TONC, releasing Andersen from, among other things, =93any and all=94
claims, including =93claims that in any way arise from or out of, are
based upon or relate to [Edwards's] employment by, association with or
compensation from=94 Andersen. As the Court of Appeal held, to the
extent Andersen demanded Edwards execute the TONC as consideration for
release of the invalid provisions of the noncompetition agreement, it
could be considered a wrongful act for purposes of his claim for
interference with prospective economic advantage. An employer =93cannot
lawfully make the signing of an employment agreement, which contains
an unenforceable covenant not to compete, a condition of continued
employment =85 . [A]n employer's termination of an employee [*23] who
refuses to sign such an agreement constitutes a wrongful termination
in violation of public policy.=94 (D'Sa v. Playhut, Inc., supra, 85
Cal.App.4th at p. 929.)
More im****tantly here, however, are the provisions of the TONC that
pur****t to release Andersen from liability for claims arising out of
Edwards's employment with that company. These are the provisions that
Edwards contested in the appellate court. As is a fairly typical
practice, at the time of his separation from Andersen, Edwards was
asked to execute a broad general release in Andersen's favor. Section
(1)(d) of the TONC provided that Edwards must release and discharge
Andersen from =93any and all actions, causes of action, claims, demands,
debts, damages, costs, losses, penalties, attorneys' fees,
obligations, judgments, expenses, compensation or liabilities of any
nature whatsoever, in law or equity, whether known or unknown,
contingent or otherwise, that Employee now has, may have ever had in
the past or may have in the future against any of the Released Parties
by reason of any act, omission, transaction, occurrence, conduct,
cir***stance, condition, harm, matter, cause, or thing that has
occurred from the beginning of [*24] time up to and including the
date hereof, including, without limitation, claims that in any way
arise from or out of, are based upon or relate to Employee's
employment by, association with or compensation from [Andersen] or any
of its affiliated firms, except for claims (i) arising out of
[Andersen's] obligations set forth in this agreement or (ii) for any
accrued and unpaid salary or other employee benefit or compensation
owing to Employee as of the date hereof.=94 The trial court concluded
that on the issue of waiver of indemnity, the TONC was a typical broad
release that did not request indemnity rights be waived. The court
added that =93the Labor Code pretty much tells us that right can't be
waived. As a matter of law, any provision in the release that attempts
to waive it would be void.=94 The court concluded that it did not have
to reach the question because the release did not require Edwards to
=93give up his rights as a matter of law.=94
The Court of Appeal disagreed. It concluded that the TONC's plain
language did indeed implicitly waive Edwards's Labor Code section
2802, subdivision (a), indemnity rights, and that Andersen could not
make Edwards's future employment contingent on his [*25] waiving the
statutorily mandated rights. As we explain, we disagree with the Court
of Appeal on this point.
Labor Code section 2802, subdivision (a), provides for an employee's
right to indemnity. That subdivision reads: =93An employer shall
indemnify his or her employee for all necessary expenditures or losses
incurred by the employee in direct consequence of the discharge of his
or her duties, or of his or her obedience to the directions of the
employer, even though unlawful, unless the employee, at the time of
obeying the directions, believed them to be unlawful.=94
(9) Labor Code section 2804 voids any agreement to waive the
protections of Labor Code section 2802 as against public policy. Labor
Code section 2804 provides, =93Any contract or agreement, express or
implied, made by any employee to waive the benefits of this article or
any part thereof, is null and void, and this article shall not deprive
any employee or his personal representative of any right or remedy to
which he is entitled under the laws of this State.=94 (Italics added.)
(10) Courts have interpreted Labor Code section 2804 to apply to Labor
Code section 2802, making all contracts that waive an employee's right
to indemnification [*26] null and void. (See Liberio v. Vidal (1966)
240 Cal.App.2d 273, 276, fn. 1 [49 Cal. Rptr. 520].) Thus, indemnity
rights are nonwaivable, and any contract that does pur****t to waive an
employee's indemnity right would be contrary to the law and therefore
unlawful to that extent. n6
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -6
Webster's Collegiate Dictionary (1991) at page 1459 defines =93unlawful=94
as =93not lawful; contrary to law; illegal.=94 (Italics added.)
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
(11) =93California has a strong public policy that favors the
indemnification (and defense) of employees by their employers for
claims and liabilities resulting from the employees' acts within the
course and scope of their employment.=94 (Chin et al., Cal. Practice
Guide: Employment Litigation (The Rutter Group 2007) =B6 3:1, p. 3-1.)
Labor Code section 2802 codifies this policy and gives an employee a
right to indemnification from his or her employer. (See Grissom v.
Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 59=9660 [1 Cal. Rptr. 2d
808] [the purpose of Lab. Code, =A7 2802 is =93to protect employees from
suffering expenses in direct consequence of doing their jobs=94]; Janken
v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 74, fn. 24 [53 Cal.
Rptr. 2d 741] [Lab. Code, =A7 2802 =93shows a legislative intent that
duty-
related losses ultimately fall on the business [*27] enterprise, not
on the individual employee=94].)
Edwards asserts that the TONC's language releasing =93any and all=94
claims encompassed his statutorily nonwaivable right to
indemnification under Labor Code section 2802, thus amounting to an
independent wrongful act that would sup****t his intentional
interference with prospective advantage claim. The Court of Appeal
agreed with Edwards, concluding that although the TONC did not
reference the right to indemnity, it did not have to because those
rights were =93necessarily encompassed within the clear terms of the
broad release.=94 The Court of Appeal found it especially telling that
Labor Code section 2802 requires indemnification for =93all necessary
expenditures or losses incurred by the employee in direct consequence
of the discharge of his or her duties,=94 and that the TONC waives
claims for losses, costs, and expenditures =93of any nature whatsoever.=94
Although the Court of Appeal noted that the TONC did not expressly
waive Edwards's indemnity rights, the court cited Bardin v. Lockheed
Aeronautical Systems Co. (1999) 70 Cal.App.4th 494, 505 [82 Cal. Rptr.
2d 726] (Bardin), for the rule that =93[a] broadly worded release covers
all claims within the scope of the language, [*28] even if the
particular claim is not expressly listed.=94 In Bardin, the appellant,
Bethany Bardin, applied for a job with the Los Angeles Police
Department (LAPD). The LAPD performed an investigation into Bardin's
background, in the course of which it obtained information from her
former employer, Lockheed Martin Cor****ation (Lockheed). (Id. at pp.
497=96498) When applying to the LAPD, Bardin signed a =93Release and
Waiver=94 form that =93released any former employer from =91any or all
liability for damage of whatever kind, which may at any time result to
[appellant], =85 because of compliance with this authorization and
request to release information =85 .=92 =94 (Id. at p. 498.) When the LAPD
did not offer her a job, Bardin sued Lockheed, claiming it provided
the LAPD with misleading negative information that caused the LAPD to
reject her employment application. (Id. at pp. 498=96499.) Bardin
claimed that the release did not =93expressly release respondents from
disseminating false or baseless statements,=94 but the court disagreed,
finding that the release =93broadly and unambiguously releases a former
employer =91from any and all liability for damage of whatever kind
=85 .=92=94 (Id. at p. 505.)
The language [*29] =93any and all=94 is common to both the release in
Bardin and the release in the present case (and is common to most
release agreements). In addition, the remaining language in both
releases is generally similar. But the rights being released in each
are entirely different. Unlike the rights at issue in Bardin, the
indemnity rights in the present case are nonwaivable under Labor Code
section 2802, and any waiver that attempts to waive those rights is
unlawful. Therefore, the fact that we must interpret those rights as
within the scope of the phrase =93any and all,=94 makes Bardin inapposite
here.
In contrast to Bardin, the TONC at issue here expressly excepted two
types of claims from release. The first were claims arising from the
TONC itself. The second was for =93any accrued and unpaid salary or
other employee benefit or compensation owing to Employee as the date
hereof.=94 The Court of Appeal believed that indemnity rights did not
fall within either of these exceptions, and even if the right to
indemnification did qualify as compensation, the release remained
invalid because its exception applied only to compensation owed as of
the date of the agreement, a clause that would have improperly [*30]
waived Edwards's right to future indemnity claims under Labor Code
section 2802. The court also noted that because the release expressly
excepted two types of claims, but did not expressly exempt
indemnification rights, the release intended to waive those rights. As
we explain, under Labor Code section 2802, a contract provision
releasing =93any and all=94 claims generally does not encompass
nonwaivable statutory protections, and in particular does not
implicitly apply to an employee's right to indemnification from the
employer.
(12) =93Where the language of a contract is clear and not absurd, it
will be followed. [Citations.] But if the meaning is uncertain, the
general rules of interpretation are to be applied.=94 (1 Witkin, Summary
of Cal. Law (10th ed. 2005) Contracts, =A7 741; Civ. Code, =A7=A7 1637,
1638; see also Sierra Vista Regional Medical Center v. Bont=E1 (2003)
107 Cal.App.4th 237, 245=96246 [132 Cal. Rptr. 2d 9].) Here the meaning
is in dispute and uncertain; we must therefore decide what the phrase
=93any and all=94 means. (13) =93If a contract is capable of two
constructions courts are bound to give such an interpretation as will
make it lawful, operative, definite, reasonable and capable of being
carried into effect =85 [*31] .=94 (Rodriguez v. Barnett (1959) 52 Cal.
2d 154, 160 [338 P.2d 907]; see also Jones v. Humanscale Corp. (2005)
130 Cal.App.4th 401, 411 [29 Cal. Rptr. 3d 881]; Loral Corp. v. Moyes
(1985) 174 Cal.App.3d 268, 278 [219 Cal. Rptr. 836]; Civ. Code, =A7=A7
3541 [=93[a]n interpretation which gives effect is preferred to one
which makes void=94], 1643 [=93[a] contract must receive such an
interpretation as will make it lawful, operative, definite,
reasonable, and capable of being carried into effect=94].)
(14) The TONC did not expressly reference indemnity rights, and we
should not read it as encompassing a waiver of Edwards's indemnity
rights. Giving the TONC such a reading is consistent with the tenets
of contractual interpretation because it makes the contract lawful,
valid and capable of being carried into effect. In addition, our
conclusion makes it unnecessary to insert additional language or terms
into the contract, which is consistent with Code of Civil Procedure
section 1858 and its mandate that when courts construe an instrument,
a judge is =93not to insert what has been omitted, or to omit what has
been inserted =85 .=94 =93[I]t [*32] is one of the cardinal rules of
interpreting an instrument to give it such construction as will make
it effective rather than void.=94 (Toland v. Toland (1898) 123 Cal. 140,
143 [55 P. 681].) We apply this rule in holding that a contract
provision releasing =93any and all=94 claims, such as that used in the
TONC in the present case, does not encompass nonwaivable statutory
protections, such as the employee indemnity protection of section
Labor Code 2802. In so holding, we interpret the TONC such that it
does not violate Labor Code section 2804. As a consequence, the TONC
is neither unlawful nor null and void.
(15) Even if we ignored the above principles of contract
interpretation, we would still find that releasing =93any and all=94
claims does not implicate Edwards's nonwaivable right to indemnity.
Andersen contends it did not except indemnity rights from the release
because it was aware that under Labor Code section 2804, such rights
are statutorily nonwaivable. Andersen asserts essentially that such an
exception was legally unnecessary. California case law arguably
sup****ts Andersen's contention. =93 =91 =93[A]ll applicable laws in
existence when an agreement is made, which laws the parties are
presumed to know and [*33] to have had in mind, necessarily enter
into the contract and form a part of it, without any stipulation to
that effect, as if they were expressly referred to and
incor****ated.=94 [Citation.]=92 =94 (Torrance v. Workers' Comp. Appeals
Bd.
(1982) 32 Cal.3d 371, 378 [185 Cal. Rptr. 645, 650 P.2d 1162], quoting
Alpha Beta Food Markets v. Retail Clerks Union (1955) 45 Cal.2d 764,
771 [291 P.2d 433].) This means that when we interpret the TONC, we
could presume that Andersen knew Edwards's indemnity rights were
statutorily nonwaivable. It also means we may treat the TONC as if it
expressly includes the substance of Labor Code section 2804: that no
employee's right to indemnification, to which he or she is entitled
under the law, can be waived. (Liberio v. Vidal, supra, 240 Cal.App.2d
at p. 276 & fn. 1.) Therefore, the waiver of =93any and all=94 claims
would not encompass the right to indemnification, because we treat the
TONC as expressly incor****ating the law that the employee cannot waive
that right. n7
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -7
Our holding that contracts ordinarily are presumed to incor****ate
statutory requirements and that the TONC here was not per se unlawful,
does not preclude Edwards from offering proof on remand of facts that
might prove the exception to the general [*34] rule based on
Andersen's conduct. We express no opinion concerning the merits of
such a claim, which alleges a factual theory that is independent of
the legal theory the trial court resolved and that we review in this
opinion.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Edwards suggests contract drafters could easily fix the overbroad
release problem by including the clause =93except as otherwise
prohibited by law=94 after =93any and all.=94 We fail to see what
differenc=
e
this would make. The phrase =93except as otherwise prohibited by law=94 is
vague and essentially informs the employee of nothing. In addition, it
appears most practitioners already operate with the understanding that
the release does not encompass items =93otherwise prohibited by law.=94 If
they do, they are null and void under the Labor Code. Therefore, we
believe that voiding all existing releases which include the language
=93any and all=94 is inappropriate.
(16) We conclude that a contract provision releasing =93any and all=94
claims does not encompass nonwaivable statutory protections, such as
the employee indemnity protection of Labor Code section 2802 and,
accordingly, is not void under Labor Code section 2804.
DISPOSITION
We hold that the noncompetition agreement here is invalid under
[*35] section 16600, and we reject the narrow-restraint exception
urged by Andersen. Noncompetition agreements are invalid under section
16600 in California even if narrowly drawn, unless they fall within
the applicable statutory exceptions of sections 16601, 16602, or
16602.5. In addition, we conclude that the TONC at issue in this case
did not pur****t to release Andersen from any nonwaivable statutory
claims and therefore is not unlawful under Labor Code sections 2802
and 2804.
We therefore affirm in part and reverse in part the Court of Appeal
judgment, and remand the matter for proceedings consistent with the
views expressed above.
George, C. J., Baxter, J. Moreno, J. and Corrigan, J., concurred.
CONCUR BY: KENNARD
DISSENT BY: KENNARD
DISSENT
KENNARD, J., Concurring and Dissenting=97
Plaintiff Raymond Edwards, a certified public accountant, was employed
by defendant Arthur Andersen in its Los Angeles office as a tax
manager, and he was eventually promoted to senior manager. When
Edwards was hired in 1997, Andersen insisted that he sign a
noncompetition agreement that barred him from leaving Andersen and
(during the subsequent 18 months) performing the same professional
services for any of the same clients.
In the wake of the [*36] Enron scandal, Andersen sold its domestic
accounting practice to various purchasers. HSBC USA, Inc. (HSBC)
agreed to purchase Edwards's practice group. As part of this purchase,
employees in Edwards's practice group would resign from Andersen and
they would be offered employment at HSBC, where they would perform the
same duties they had previously performed at Andersen, but to do so,
they first needed to sign a =93Termination of Non-compete
Agreement=94 (TONC). The TONC was a general release of claims against
Andersen, in exchange for which Andersen would release the employee
from the noncompetition agreement, thereby freeing the employee to
advise the same clients on behalf of their new employer.
Edwards explains in his brief that he =93was painfully aware that he was
exposed to potential liability by Andersen's marketing of disallowed
tax shelters, and [therefore] he specifically raised the issue of
waiver of his indemnification rights when Andersen presented him with
the release.=94 Andersen, however, insisted that he sign the release.
When Edwards refused to do so, Andersen terminated him without paying
severance benefits, and HSBC withdrew its offer of employment.
Edwards sued Andersen, [*37] HSBC, and an HSBC subsidiary. After he
settled with HSBC and the subsidiary, and after the trial court
sustained a demurrer to Edwards's claim under the Cartwright Act (Bus.
& Prof. Code, =A7 16720 et seq.), his only remaining claim against
Andersen was for intentional interference with prospective economic
advantage. One element of this tort is that the act of interference be
wrongful for a reason independent of the interference itself. (See
Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376,
392=96393 [45 Cal. Rptr. 2d 436, 902 P.2d 740].) Among other things,
Edwards asserted that the 1997 noncompetition agreement was invalid
under Business and Professions Code section 16600, and it was
therefore wrongful for Andersen to require him to sign the TONC as a
condition for releasing him from the invalid noncompetition agreement.
Edwards also asserted that releases of employee indemnity rights are
=93null and void=94 under Labor Code sections 2802 and 2804, and it was
therefore wrongful for Andersen to include in the TONC a release of
such rights.
The trial court held a bifurcated trial on the issue of the validity
of the 1997 noncompetition agreement and the TONC. Without taking
evidence, the court found both agreements [*38] valid as a matter of
law, and it granted judgment in favor of Andersen. The Court of Appeal
reversed, concluding that both the noncompetition agreement and the
TONC were invalid and that Andersen's actions were therefore wrongful.
The majority affirms in part and reverses in part the judgment of the
Court of Appeal. The majority agrees with the Court of Appeal that the
noncompetition agreement was invalid under Business and Professions
Code section 16600 (maj. opn., ante, at pp. ___=96___) and concludes
that =93to the extent Andersen demanded Edwards execute the TONC as
consideration for release of the invalid provisions of the
noncompetition agreement, it could be considered a wrongful act for
purposes of his claim for interference with prospective economic
advantage=94 (id. at pp. ___=96___). I agree.
The majority, however, disagrees with the Court of Appeal's conclusion
that the TONC was invalid. (Maj. opn., ante, at pp. ___=96___.) On this
point, I disagree with the majority.
The majority focuses on the TONC's use of the words =93any and all =85
claims,=94 concluding that the phrase is ambiguous (maj. opn., ante, at
p. ___) and should be interpreted narrowly to make the release =93valid
and capable of [*39] being carried into effect=94 (id. at p. ___). On
that basis, the majority concludes that the words =93any and all=94 were
not intended to encompass within the release's scope indemnity claims
that under Labor Code sections 2802 and 2804 are not subject to
release. (Maj. opn., ante, at p. ___.) The majority finds persuasive
Andersen's argument that the TONC did not need to include an express
exception preserving these indemnity claims because these indemnity
rights are statutorily nonwaivable. (Id. at pp. ___=96___.) Thus, the
majority reads the TONC =93as if it expressly includes the substance of
Labor Code section 2804: that no employee's right to indemnification,
to which he or she is entitled under the law, can be waived.=94 (Maj.
opn., ante, at p. ___.)
But the majority fails to analyze the language of the TONC that most
strongly sup****ts Edwards's argument. The TONC did not merely require
Edwards to release Andersen from =93any and all=94 claims; it specifically
required Edwards to release Andersen from =93any and all =85 losses [or] =
=85
expenses =85 including =85 claims that =85 arise from =85 employment
=85 .=94 (Italics added.) This language closely tracks Labor Code section
2802, subdivision (a), [*40] which requires an employer to indemnify
an employee =93for all necessary expenditures or losses incurred by the
employee in direct consequence of the discharge of his or her duties
=85 .=94 (Italics added.) Thus, although it is true that the TONC did not
use the words =93indemnity claims=94 and did not mention Labor Code
section 2802, it unambiguously required Edwards to release the precise
indemnity rights that Labor Code section 2802 grants him.
Andersen argues in effect that the TONC was a standard release of =93any
and all=94 claims, that the TONC failed to spell out a special exception
preserving indemnity claims, but that in light of Labor Code sections
2802 and 2804, the exception was implied. That argument, however,
mischaracterizes the TONC. The TONC was not a vague general release
whose only shortcoming was the failure to include a special exception
preserving indemnity claims; rather, the TONC used language expressly
releasing the precise indemnity claims that the Labor Code preserves.
Therefore, this court should not lightly dismiss the Court of Appeal's
conclusion that Andersen may have wanted its employees to think they
had released their indemnity rights, although it knew that [*41] any
release of such rights was void. As the Court of Appeal explained,
quoting from Latona v. Aetna U.S. Healthcare Inc. (1999) 82 F.Supp.2d
1089, 1096: =93 =91[D]efendant's argument, that the Agreement cannot
violate public policy because =85 it is simply a nullity, ignores the
realities of the marketplace. =85 Employees, having no reason to
familiarize themselves with the specifics of California's employment
law, will tend to assume that the contractual terms proposed by their
employer =85 are legal, if draconian. =85 Thus, the in terrorem effect of
the Agreement will tend to secure employee compliance with its illegal
terms in the vast majority of cases.=92 =94
This latter point goes directly to the independent wrongfulness of
Andersen's conduct, which is a critical issue for purposes of
Edwards's claim of intentional interference with prospective economic
advantage. Labor Code section 2804 states that an agreement is =93null
and void=94 if it waives the indemnity rights set forth in Labor Code
section 2802, and it prescribes no other penalty. Therefore, Andersen
asserts that, even if the TONC is overbroad, Andersen's conduct in
asking Edwards to sign the TONC was not wrongful; rather, [*42] the
release is merely =93null and void=94 to the extent of its overbreadth. I
disagree.
If Andersen had merely drafted a vague general release without
specifically describing indemnity claims, I would conclude, as does
the majority, that Andersen's actions were taken in good faith and
that the release's broad language should be read in light of existing
law, making it =93null and void=94 (Lab. Code, =A7 2804) to the extent the
release's provisions might be read to cover nonwaivable rights. But
instead Andersen drafted a release that expressly released specific
claims (employment-related losses and expenses) that Andersen knew
were not subject to release. As the Court of Appeal observed,
Andersen's actions suggest a possible purpose of misleading employees
into thinking they had waived rights that could not be waived, thereby
minimizing the number of indemnity claims these employees might bring
against Andersen.
In my view, Andersen's insistence that Edwards sign the TONC was
sufficiently wrongful to sup****t Edwards's claim of intentional
interference with prospective economic advantage. I would therefore
affirm the judgment of the Court of Appeal in its entirety.
Werdegar, J., concurred.
|
